Australian Dollar Under Pressure Ahead of Fed Decision

The Australian dollar steadied around $0.71, holding its recent decline near a four-week low as a firmer US dollar and higher Treasury yields weighed on the currency ahead of the Federal Reserve’s policy decision. The greenback strengthened as markets widely expected the Fed to raise interest rates by 25 basis points, its first increase in around three years, while the US 10-year Treasury yield climbed above 5%, its highest level since 2007, as surging oil prices and persistent inflation concerns reinforced expectations for tighter policy. Oil prices held near a four-month peak above $105 a barrel after fresh Houthi attacks on Saudi Arabia and the postponement of Gulf-Iran talks. Domestically, the Reserve Bank of Australia’s hawkish stance continues to provide some support, with markets pricing an 85% probability of a rate increase to 4.60% at its September 29 meeting. Investors now await comments from Governor Bullock, which is scheduled to appear before Parliament on Friday.

The Australian dollar fell to around $0.71, reaching its lowest level in more than three weeks as hotter-than-expected US inflation data strengthened the case for a Federal Reserve rate hike. After the data release, traders ramped up wagers to 86% that the US Federal Reserve will raise rates at its meeting next week, while also pricing in another hike later in the year, boosting the US dollar. In Australia, hawkish comments from the Reserve Bank, along with rising oil prices, have pushed markets to price in a 90% chance of a rate hike later this month. RBA Assistant Governor Sarah Hunter said last week that the central bank may need to raise rates again if inflation proves more persistent than expected. Meanwhile, Brent crude continued to rise above $100 a barrel after new Houthi strikes on Saudi Arabia and Iranian attacks on ships in the Gulf compounded supply concerns following the closure of a key Saudi oil pipeline.

The Australian dollar held its recent decline below $0.72, staying near its lowest in more than a week and on track for a weekly loss as the US dollar strengthened alongside a sharp rise in Treasury yields. The greenback gained after US producer inflation came in stronger, reinforcing expectations that the Fed could raise rates next week. A sharp rise in Treasury yields also underpinned the dollar following lower-than-expected purchases by the US Treasury Department during its first expanded buyback operation. Meanwhile, oil prices continued to rise above $100 per barrel amid the escalating Middle East tensions, raising inflation risks and expectations that central banks may keep policy tighter for longer. Markets ramped up bets on a fourth rate hike this year by the Reserve Bank of Australia, with swaps now implying an 84% chance of a 25-bp increase at the upcoming meeting this month. Markets also expect the cash rate to reach 4.85% by early next year, its highest level since 2008.